Good day and welcome to the Rollins, Inc. Second Quarter 2016 Earnings Conference Call. Today’s conference is being recorded. [Operator Instructions] I would now like to introduce your host for today’s call, Marilynn Meek. Ms. Meek, you may begin.

Thank you, Valerie. By now, you should have all received a copy of the press release. However, anyone is missing a copy and would like to receive one, please contact our office at 212-827-3746 and we will send you a release and make sure you are on the company’s distribution list. There will be a replay of the call, which will begin 1 hour after the call and run for 1 week. The replay can be accessed by dialing 1888-203-1112, with the pass code 9004116. Additionally, the call is being webcast at www.viavid.com and a replay will be available for 90 days. On the line with me today are Gary Rollins, Vice Chairman and Chief Executive Officer and Eddie Northen, Vice President, Chief Financial Officer and Treasurer. Management will make some opening remarks and then we will open up the line for your questions. Gary, would you like to begin?

Yes. Thank you, Marilynn and good morning. We appreciate all of you joining us for our second quarter 2016 conference call and Eddie will read our forward-looking statement and disclaimer and then we will begin.

Our earnings release discusses our business outlook and contains certain forward-looking statements. These particular forward-looking statements and all other statements that have been made on this call, excluding historical facts are subject to a number of risks and uncertainties and actual risks may differ materially from any statement we make today. Please refer to today’s press release and our SEC filings, including the Risk Factors section of our Form 10-K for the year ended December 31, 2015 for more information and the risk factors that could cause actual results to differ.

Thank you, Eddie. We are pleased to have posted positive results for the quarter marking our 41st consecutive quarter of improved revenue and earnings. For the quarter, revenue grew 4.8% to approximately $411.1 million compared to $392.2 million in last year’s second quarter. Income before taxes increased 6.4% to $77 million compared to $72.3 million for the second quarter of 2015. Net income rose 6% to $47.8 million or $0.22 per diluted share compared to net income of $45.1 million or $0.21 per diluted share for the same period last year. Revenues for the first six months grew 5.6% to $763.9 million compared to $723.1 million for the same period of last year. Net income increased 5.8% to approximately $79.7 million with EPS of $0.36 per diluted share compared to $75.4 million or $0.34 per diluted share. Historically, the company’s revenue and profit performance are somewhat lumpy from quarter to quarter. As examples, the weakest revenue percent increased last year was the third quarter. And in 2014, it was the fourth quarter. This repeated itself this year as the second quarter percent increase of 4.8% was a pace less than the first quarter. We think Mother Nature has a role in this regard and unfortunately we can’t control that. After saying that, I want to add that all of our business lines experienced good growth during the quarter, with residential pest control up 6.7% and commercial pest control grew 2.6%, while termite increased 5.2%. Eddie will provide more details on these numbers in a few minutes. The rollout of our CRM and new operating system, BOSS, went extremely well in the second quarter with over 95% of the working branches on the system by quarter end. We remain on track to have this rollout completed by the end of this…

Thank you, Gary. We had a solid revenue growth that helped with our 41st consecutive quarter of improved earnings results. Even with accelerating BOSS related costs pushed into the first quarter, into this quarter as well, we had a strong 6% net income growth. Many of our operations have gone through a substantial effort during the very busy time of the year in order to get this project finished in August. Each of our service lines showed continued growth and key to the quarter included continued strong residential and termite revenue gain, new international market expansion, strong HomeTeam results and significantly higher year-over-year BOSS expense. Looking at the numbers, the company reported second quarter revenues of $411.1 million, an increase of 4.8% over the prior year’s second quarter revenue of $392.2 million. Good steady growth continued in 2016. For the quarter, income before income taxes increased 6.4% to $76.9 million. Last year, we had a small positive tax adjustment, which didn’t repeat this year. Our foreign taxes were a bit higher than last year due to the growth in our foreign operations. And as a result, net income increased 6% to $47.8 million with earnings per share of 4.8% to $0.22 versus $0.21 per diluted share last year in the second quarter. I will talk in a few minutes about our BOSS results to-date, but first I want to circle back to share some of the tremendous results that HomeTeam continues to produce. As they approach their milestone 1 million Taexx tubes in the wall pest control installations since inception they continued double-digit installation growth. Year-to-date, new installations were up 11.6%. Each install gives us an opportunity for HomeTeam to capture a new recurring pest control customer. Part of the continued overall Rollins termite success can be attributed to the…

Thank you, Eddie. Well, Eddie and I are here to answer any questions that you might have.

Thank you. [Operator Instructions] And we will take our first question from the line of Jamie Clement of Macquarie. Please go ahead.

Gary, Eddie, good morning.

Good morning.

Good morning, Jamie.

Gary, when you were talking about your comments on HomeTeam, you mentioned that it had a contributing factor on the high growth rate in termite that you had during the quarter. Obviously, we know about HomeTeam. I don’t recall really historically you calling out HomeTeam is being a major contributor to termite. So, have you emphasized pre-treat through them more in recent quarters or in recent year or so or is it something that’s been there all along?

Hey, Jamie, this is Eddie. So, I am the one who had this comment.

My bad, I am sorry.

That’s okay. I think this is something that has been there through time. I don’t know that it’s necessarily tremendously different as far as the overall impact. Just wanted to highlight the fact that they do continue to have substantial growth in this particular part of what they offer, especially with the new builders. The thing that’s a positive there as we get a chance for that pretreatment and we are getting another opportunity to have a new customer, which has really given us an opportunity to continue to grow both on the termite and on the pest control sides.

And I think the size of the builders that we represent gives us a wonderful opportunity. One of the requirements of financing and most states require that there would be a pretreatment done on new homes. So, we are handy and we are taking advantage of it.

Now, Gary, with that requirement, is this sort of like does the homebuyer actually have to opt into that in some technical way or is it something where the builder just contracts with you and it’s going to happen regardless of what the incoming homeowner wants once that happens?

It’s a builder requirement.

Okay, got it.

As the homeowner at the time is not a typically – is not a homeowner.

Right, right.

It’s one of the first things that are done when a home start comes out of ground when the slab is poured is when the pretreatment is done.

Got it. And just to follow-up. Eddie, with respect to the BOSS system rollout, I think you gave us the kind of the incremental depreciation expense year-over-year. In terms of operating expense both that you can quantify as well as the stuff that’s a little bit less tangible, what do you think the total cost during the quarter other than depreciation related to BOSS may well have been that by let’s say the fourth quarter or first half of next year will be gone from your quarterly numbers?

Well, so in Q1 and Q2, we enhanced our rollout and a large part of the cost of that are the implementation teams. So, we basically in Q1 and Q2 kind of doubled up our efforts of what we have seen in previous quarters. So, we have contractors that we use for that where we actually have people at each one of the branch locations that are there as trainers that they are going through the implementation phase. So, that’s a large part of the overall expense as we roll this out. And then of course, the actual iPhone kits themselves. So, again in Q1 and Q2, we are doubling up our expense and our efforts there as we are getting those rolled out and that’s how we got to this total of over 5,300 total active users.

Okay. Are you depreciating the – are the iPhones CapEx though or are those actually OpEx or was it a mix?

Yes. So, the iPhones are OpEx, the depreciations for the system. So, the depreciation obviously will continue to build over time. And we will have that full Q3 as you move forward, but the implementation costs should be the part that will be reduced substantially in Q3 and will be eliminated in Q4 and the same thing with the iPhone kits.

Alright, that’s helpful. Because I think I may have had that wrong, because I would assume iPhones, I assume that was actually CapEx rather than actually flowing through the P&L, so my bad on that. Anyway, thanks.

Yes, okay.

Anyway, thanks very much for the time, Eddie. I appreciate it.

Thank you.

Thank you. We will move to our next question from the line of Joan Tong of Sidoti & Company. Please go ahead.

Good morning, Gary and Eddie. How are you guys?

Good morning, Joan.

Good morning.

So, the first question of regarding the growth rates and Gary, you mentioned the growth rate a little bit lighter in the first quarter. And if I were to ask you about the operating metrics that you always seemed to comment on that on each conference call, for example, the lead, the retention rate as well as the customer closing rates. Are those numbers, like in line with what you expected?

Yes. Retention was in line with what we expected. The phenomena of the pace, I guess, everybody has got a theory. I think my theory is that Mother Nature has more to do with that than anything. We were staffed. Our advertising was going. Our digital marketing was going. I mean, there was no operational hiccup. It was just a matter of leads and demand really.

Joan, if you look at the total revenue through the first two quarters and you compare back to the last three years, we are ahead of the pace of the last three years. So, I think Gary’s word of lumpiness is probably the best way to look at that. Q1 obviously was strong and Q2 not quite as strong as that. But to his point, retention rate is still well in line with where we expect them to be and sales results for service lines are in line as well.

Okay. Because if you look at the commercial growth rate it’s particularly weak, I wouldn’t say weak – it seems to be growing at that 2%, 3% range. So, other than the lumpiness of the business, is there anything else like changes in competitive landscape, any specifically for that particular business line on commercial?

I really don’t think so. Our leads were not as strong as we like. Our commercial businesses, lot of good commercial businesses are sold in the branches and it’s influenced by the leads that we get. So, you might think, first of all, that commercial shouldn’t be impacted by Mother Nature, but it is and it doesn’t influence the lead flow. So, that’s our staffing was there, our pricing was there. We have had competition from the start. So, I don’t really think that anything unique is taking place in the competitive area. That would be my take, Joan, on the situation.

Yes. Joan, I think we have had good growth on the residential and on the termite side. And if you take a look at the commercial kind of like our revenue in total, if you look at our commercial year-to-date, we are higher at 3.6% than we were for the full year 2015. So, it’s not growing at the same rate necessarily as the residential or the termite in this quarter, but still well in line if you look at it just from last year’s number.

Okay, alright. That’s fair. And maybe moving forward to the expenses – to the expenses questions, I mean Jamie asked about the depreciation and amortization expenses, I got it like what $12 million for this quarter, is it a good run rate, so next quarter are we going to see like a further hedge up that I assume that’s the case. And that’s first question. And then second question, it seems to me like your iPhone kit expenses is not done yet, so fourth quarter, I am not sure you talked about it might edge down but maybe there will be more next year, can you just elaborate on that two fronts?

So let me go to your second question first. So we are 95% done with the Orkin brand at the end of the quarter. At this point in time, as I mentioned in my remarks, we are still assessing what we are going to do if anything with the other independent brands. We are going to take a look and see what makes sense from a financial perspective with the changes we would have to make to the system and then what the return would be for those independent brands. So once we get done with this work and at this point in time, we will be done with the iPhone kits as far as the add-on and again we have 5% of total Orkin left. That will be done in Q3 and we won’t have any expense at all in Q4 unless we would make the decision to move forward with one of the other independent brands which of course we will share with you once we know more along those fronts.

Okay.

And when we take a look at – if you take a look at some of those other independent brands and the reason why we are having to go through and do this assessment is because they are very different than Orkin. Some of their business models are different. Some of them are more weighted towards commercial where it may or may not be the same benefits that we would see as an overall more balanced Orkin groups. So that’s what’s going on with that analysis right now.

Okay. And did you disclose like what’s the elevated expenses related to BOSS and that it’s going to roll off in the fourth quarter, is it like a major impact on your bottom line a $1 or $2?

Yes. We didn’t break that out. But I think we are going to be along the same lines of what we saw a year ago when we talked about what the impact was for the entire year. So if you think about what we talked about as far as entire year, we finished everything off through the first two quarters. And then we will go through from there and be able to have virtually nothing in the fourth quarter and much less in the third quarter. The implementation piece is a big piece. It’s going to go away. And we won’t need as many developers to be able to help with the changes that we had to make as we have been rolling this out. So those are all going to be pieces they are going to go into that.

Okay, great. Alright. Thank you. And then maybe talk a little bit about the UK pest control landscape, is it your first acquisition in that area, so I assume that like you are – we will continue on like making effort there in terms of expanding that region, just like how you did that in Canada years ago and then like in Australia. And so can you just maybe talk about like how the competitive landscape like we know that there is a sizable competitors on the top, but is it also pretty fragmented at the bottom?

It is. It’s very fragmented. I am not sure if it’s to the same exact degree that we have in the U.S., but it’s a very, very fragmented market. And I think we are just going to have this be another one of the opportunity areas that we look at as we are looking at the best way to deploy our cash from an acquisition perspective, as we look around the world.

Joan, there is another advantage to this acquisition. We really want an international model branch to show our franchise owners and potential owners. I mean now they come over to the U.S. and they visit our commercial operations typically in our residential. And they are just not the same that that independent owner really has to model his business after. So one of the pluses, I think that we are going to get is we are going to have a model operation that they can get a better sense of really how to get organized and how to conduct their business.

Alright. Thank you, guys.

Thank you.

Thanks Joan.

Thank you. [Operator Instructions] And we will take our next question from the line of Sean Kennedy of Nomura. Please go ahead.

Good morning Gary and Eddie. Thanks for taking my questions.

Good morning Sean.

Eddie, you mentioned the way BOSS has affected the business so far, but have you identified any new opportunities related to BOSS as it becomes more mature?

Well, I think when we first looked at BOSS over 2 years ago, they were I am sure a few things that came to everyone’s mind that would be able to benefits to make this, make sense. And I think as we roll, I think a few different things. I think the role of the administrative team and the branches is going to be completely different. We knew they were going to tasks that we are going to be eliminated which had been eliminated. But I think to the degree of how we foresee them being, we are really going to be change that branch administrative person now to become much more customer focused. We are seeing that in the retention rates that I mentioned earlier. I talked about specific numbers on last quarter, but I talked about just in general we continue to see our pest control and our termite control retention numbers continue to get better. And I think those branch service folks as well as service technicians are all going to be able to improve that customer experience, which is going to help us with our retention. And anything that we can do to spend more time with the customer is going to do nothing, but help us with our existing customers and as far as growing our customer base. I think that’s one area. We have talked in previous calls about the routing and scheduling. I don’t know if that was on our radar to the degree that it is today with this virtual route manager as a bolt-on. So I think those are couple of areas that are going to be a key to us as we are moving forward. But the bottom line is, anything we can do to make that customer experience better, we are just going to be better for it and we think both of those pieces are going to enable us to be able to do that.

Great, got it. And just won more question, one of your competitors just announced collaboration with Google to develop an Internet of Things for pest control like applying Big Data and predictive analytics to pest control, how do you think it will impact the industry and are you engaged with similar developments at Rollins?

Well, I can tell you that our marketing group has been really involved with the data analytics piece for probably in the last 2-plus years now, breaking everything down in all the different service lines and taking a look at all the different factors that go into retaining customers, growing customers, customer segments, customer segments by income, by geography, by our different independent brands. And that’s a lot of what they use when we go through and we make our decisions on how we advertise, how we price, how we go through and make the decision on what, where we want to spend our management resources as well as our capital to be able to go through and grow our business. So I am not familiar with the specifics of what you are talking about with the competitor, but I do know that our internal marketing group from my perspective has done a tremendous job with that and helping the guidance as we continue to move forward.

Okay, great. Thanks guys.

Does that answer your question, Sean?

Okay, that’s it. Thanks.

Okay, great. Thanks.

Thank you. [Operator Instructions] And we have a follow-up question from the line of Jamie Clement of Macquarie. Please go ahead.

Hey, Gary and Eddie. Just want to follow-up. I would assume this question would have come up already, but it hasn’t, I did want to ask you about the mosquito business this summer obviously with the serious Zika virus concerns that are out there?

Okay. You just want general kind of...

Yes. Just your general thoughts like I mean I know that’s obviously historically pretty small part of your business, but it doesn’t sound like it’s been the equivalent of bedbugs from a couple of years ago to your industry, but I would imagine in certain areas of country you probably get more phone calls?

Yes. I think that’s a very serious assessment. We absolutely are. We are getting more phone calls and we are having more opportunities in lot of areas, areas that you would expect we are probably seeing more. So we saw growth in Florida earlier, because they are going to have much demand than we would see in other parts of the country. If you take a look at a very, very small base that we have, sales in a lot of areas have grown tremendously. I mean they have doubled in some areas as far as mosquito growth, but again, small base. That’s the phenomena and as you know, it’s something that built over time. Year one was big growth. But I am not sure that anybody knew that it was going to be 3 years, 4 years, 5 years, 6 years, 7 years phenomenon. And we are kind of in it’s year one right now from the Zika perspective of the mosquito. So we will continue to – we want to continue to make sure that we are playing the right role in this. We want to make sure that we are educating the community to make sure the people know and understand what they can do to be able to help reduce or eliminate the concerns they have. And if they need professional help, we actually want to be the ones to be able to help them in that perspective. But we also have a benefit of marketing our other services. I mean we may get a mosquito call, but we have an opportunity to have a recurring pest control customer. And then we also have an opportunity, we have a termite customer. So in addition to the revenue that it generates directly, there is revenue that’s generated indirectly.

Now Gary, I wanted to ask it doesn’t seem to me that the industry has historically done much advertising on regarding mosquito service and I have this feeling and maybe I m totally off base here, but that the technology that you guys can bring to bear the treatment protocols and then maybe even the chemicals are a lot better than they were 15 years ago, I just have this feeling that Americans kind of doubt whether your mosquito treatments or the industry’s mosquito treatments really work all that well, do you think there is a disconnect here and maybe an opportunity over the next couple years to push the service?

Well, we obviously we think our service is better. We do mystery shopping where we see what the competitors are doing. And there are several things that we do that in addition to what’s done. I believe as long as this Zika situation stays covered as far as the press is concerned, it generates a lot of mosquito business and that mosquito customers are really happy. I have been in this business for five decades and I never had a service that people will stop to you, talk to you at cocktail parties. I mean they are very excited about the fact that they get their back yard return to them.

Jamie, from the advertising perspective remember not everywhere in the U.S. has mosquito demand. It’s only in certain areas. I mean everybody has ants, everybody has cockroaches, everybody has other stuff, not everybody has mosquito. To Gary’s point, that he just made I am the personal mosquito customer of ours. And I have lived in this out for many, many, many years and I tried every other off the shelf product that was out there. And it does not hold the candle to this mosquito service. I mean you actually do reclaim your yard at that point of time is that something you are trying to do. And the stats are behind it. I mean it’s our best retention product that we have it over 95%.

And I think that the environmental concerns that the consumer has really sets us apart from Joe in his pickup truck and the fogging machine. And as Eddie said, we have – on the Internet, we have quite a few spikes where we really explain to the homeowner what they can do, how they can eliminate mosquito trap.

Okay. I appreciate that additional color a lot. Thank you all very much.

Thanks Jamie.

Thank you. [Operator Instructions]

Okay, I guess that’s it. And we want to thank you for being here. We look forward to reporting in the third quarter. I think we will know more about BOSS at that time because we have another quarter under our belt and branches getting more material. And we look forward to it. Thank you.

This concludes today’s call. Thank you for your participation. You may now disconnect.